Crude oil dropped to a 3-decade low, as gold trades close to 5-year lows. As usual, in such an environment, mainstream headlines become as scary as they could be. This is what we read this week:
- "Oil prices may go even lower in 2016"
- "Oil producers prepare for prices to halve to $20 a barrel"
A year and a half ago, crude oil was trading around $120 per barrel. How likely is it that it will go to $20 next year, having lost 85% of its value? The short answer: not likely! A glance at the longer term crude chart reveals some very interesting things. Probably the experts in mainstream media forgot to check the most basic price chart.
Prices have collapsed to the absolute lows not seen since the financial crisis of 2009, particularly between $33.55 and $36.50 per barrel. Next to that, the chart is signaling selling exhaustion, which is reinforced by a strong positive divergence between momentum and price.
These secular lows are indicating that selling pressure is fading, and that a lasting bottom is in the making. Time to get long, in other words, with the best energy plays. We are no technical analysts, but we look for basic chart structures. The only moving average, for instance, that we consider important for long term trends is the 90 week moving average.
As the chart above shows, the 90 week moving average (in blue) shows an incrdible deviation from current price levels. That is another indicator that selling is exhausting. A recovery in the price of crude oil would help the commodity sector, as well as gold, to recover as well. We believe that point is very close. So be careful with the mainstream media headlines. They always become the most bearish at the bottoms, and most bullish at the tops.